ABSTRACT
It is well established that an agent’s act binds the principal only if the agent has actual or apparent authority, or if the principal ratifies the unauthorized act. But confusion persists as to the legal status of the unauthorized agreement between the agent (purporting to act for the principal) and the third party. Courts confusingly refer to it almost interchangeably a ‘void’ contract, a ‘voidable’ contract, and as a non-existent, or unformed contract. All three categories appear to be uneasy fits, though: voidable contracts are presumptively valid and enforceable, void contracts cannot be ratified, and assent through ratification relates back to the time of the unauthorized agreement. One recent court decision even staked out a fourth category – not binding but nonetheless the font of new legal interests.
This Essay answers that question by looking beyond the language courts use and instead to the legal effect they afford such agreements and to the underlying contract and agency principles at play. This fresh look reveals that a lack of authority prevents a contract from forming at all: If the agent acts without actual or apparent authority and the principal does not ratify the act, the principal has not manifested the necessary assent, and so the agreement fails to satisfy the prerequisites of a contract. The third party’s assent to be bound by the agreement has the same legal effect as an offer: non-transferrable, non-enforceable, and only temporarily open. This conclusion helps explain the effect of and limits on the principal’s ratification power. It provides grounding for how courts have handled questions of authority in the context of the Federal Arbitration Act. And it reveals that the FDIC’s handling of failed banks threatens to violate the Takings Clause if courts allow the FDIC to take non-assenting principals’ property as if the unauthorized agreement were a contract.
Lindley, Tyler B, Delegated Contract Formation (May 31, 2023).
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